Monetary Policy Transmission in Pakistan: Role of Islamic Banking in Enhancing Policy Objectives and Supporting Growth

Abstract

This study investigates the role of Islamic banking in enhancing policy objectives and supporting growth in Pakistan. This research aims to explain how the real economy of Pakistan has been influenced by the Islamic financial system, particularly in channelizing monetary policy tools. The secondary data within the period of 2007 – 2020 is used to answer the research question. Industrial Production Index has taken as a dependent variable, while Islamic Financing, Islamic Deposits, and Overnight Repo as taken as independent variables. Following the prior research co-integration test, impulse response functions and variance decomposition analysis have been used, by using Eviews 10. The study has found a positive impact of Islamic banking on economic output and there is a significant positive impact of monetary policy decisions on economic output and there is an insignificant impact of financial crisis and COVID 19 in long run. It has mainly 03 implications are: Impact on real economy, Role in promoting financial stability, and different monetary policy instruments. The proposed model may offer some insights to policy makers if it is examined empirically.